For United States individual income tax, taxable income is adjusted gross income
) less allowances for personal exemptions and itemized deduction
An itemized deduction is an eligible expense that individual taxpayers in the United States can report on their federal income tax returns in order to decrease their taxable income....
s. Adjusted gross income is total gross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...
minus specific items laid out in the tax code. For most individual tax purposes, AGI is more relevant than gross income.
Gross income is sales price of goods or property, less cost of the property sold, plus other income. It includes wages, interest, dividends, business income, rental income, and all other types of income. Adjusted gross income is gross income less deductions from a business or rental activity and 21 other specific items.
Several deductions (e.g.
medical expenses and miscellaneous itemized deductions) are limited based on a percentage of AGI. Certain phase outs, including those of lower tax rates and itemized deductions, are based on levels of AGI. Many states base state income tax
State and local income taxes are imposed in addition to Federal income tax. State income tax is allowed as a deduction in computing Federal income tax, subject to limitations for individuals. Some localities impose an income tax, often based on state income tax calculations. Forty-three states...
on AGI with certain deductions.
Gross income includes "all income from whatever source," and is not limited to cash received. It specifically includes wages, salary, bonuses, interest, dividends, rents, royalties, income from operating a business, alimony, pensions and annuities, share of income from partnerships and S corporation
An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
s, and income tax refunds. Gross income includes net gains for disposal of assets, including capital gains and capital losses. Losses on personal assets are not deducted in computing gross income or adjusted gross income.
Gross income is reduced by certain items to arrive at adjusted gross income. These include:
- Expenses of carrying on a trade or business including most rental activities (other than as an employee)
- Certain business expenses of teachers, reservists, performing artists
In United States tax law, certain performing artists are eligible to deduct the expenses incurred in the course of their employment by § 62 of the Internal Revenue Code. This is an “above the line” deduction, meaning that it is used while computing a taxpayer’s Adjusted Gross Income...
, and fee-basis government officials,
- Health savings account
A health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan . The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account...
- One-half of self-employment tax,
- Allowable contributions to certain retirement arrangements (SEP IRA
A Simplified Employee Pension Individual Retirement Arrangement is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration...
, SIMPLE IRA
A SIMPLE IRA, or "Savings Incentive Match Plan for Employees Individual Retirement Account", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for later use. Specifically, it is a type of Individual...
, and qualified plans) and Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
- Penalties imposed by financial institutions and others on early withdrawal of savings,
- Alimony paid (which the recipient must include in gross income),
- College tuition, fees, and student loan interest (with limitations and exceptions),
- Jury duty pay remitted to the juror's employer,
- Domestic production activities deduction, and
- Certain other items of limited applicability.
Reporting on Form 1040
Gross income is reported on U.S. Federal individual income tax returns (Form 1040 series
) is reported by type of income. Supporting schedules and forms are required in some cases (e.g.
, Schedule B
for interest and dividends). Income of business and rental activities, including those through partnerships or S corporations, is reported net of the expenses of the business. See Schedule C
for business, Schedule E
for rentals, and Schedule F
Certain tax calculations are based on modified versions of AGI. The definition varies according to the purpose for which it is used. These modified versions may add certain items to AGI that were excluded in computing gross income. Common additions include tax exempt interest and the excluded portion of Social Security benefits.